Why Fume? Gasoline Remains A Bargain

Commentary, Energy, Frontier Centre, Worth A Look

In its most recent analysis of gas prices, the Washington-based Institute for Energy Research calculates the average inflation-adjusted U.S. pump price – for the past 90 years – at $2.26 (U.S.) a gallon. These days, at an average price of $3.30 a gallon, U.S. In 1973, the U.S. economy required 17,440 BTUs (British thermal units) to create one dollar’s worth of GDP. By 2006, it required only 8,835 BTUs, about half as much. It is this remarkable increase in energy efficiency that helps explain the paradox of high oil prices.

The rising price of gasoline irks people intensely but so far hasn’t hurt them significantly. They gas up as frequently now as they ever have. (The U.S. Energy Information Administration says Americans will buy 9.2 million barrels of gasoline a day in 2008, precisely the same as last year – though in a slower-paced economy.) In fact, of course, people are getting the energy equivalent of two tanks of gas every time they fill up. It’s like paying twice as much as you want to pay for a carton of eggs – but getting 24 of them in every dozen.

Gas prices appear almost 50 per cent higher. Yet this apparently exceptional rise puts the cost of gasoline at the same level that prevailed at the height of the oil price panic during the Iran-Iraq war in the early 1980s – when the nominal price doubled from 75 cents a gallon to $1.50 a gallon.

How exceptional is the present cost of gasoline? The U.S. Bureau of Labour Statistics says its “all-items” category of goods and services has risen in real-dollar terms by 100 per cent in the past 20 years alone. Vegetables have risen by 138 per cent, fruit by 160 per cent. Medical care has risen by 170 per cent. College tuition has risen by 263 per cent. Although now above its historic average, gasoline remains a bargain. Adjusted for inflation, for example, economy-wide transportation costs have fallen 10 per cent in the past two decades.

The more efficient use of energy is a great technological achievement. The U.S. population has increased by 90 million people (or 44 per cent) since 1975. The U.S. economy has grown by more than $7-trillion in GDP (or 160 per cent). Energy consumption, on the other hand, has risen by only 32 per cent (from 75.7 quadrillion, or thousand-trillion, BTUs to 99.5 quadrillion BTUs). Without this efficiency gain, the U.S. would have needed almost 100 per cent more energy – that is, another 100 quadrillion BTUs – to produce the same goods and services.

Some people argue that this leap in energy efficiency occurred only because U.S. companies shipped manufacturing operations abroad. Yet, from 1992 through 2005, energy-intensive U.S. manufacturers reduced their shipments by only four percentage points (from 30 per cent to 26 per cent) as a share of all manufactured shipments. And U.S. production of goods actually increased (though the number of jobs in manufacturing did fall).

Assume that energy prices remain as high through 2016 as they are now. Assume further that the U.S. produces the same efficiency gains through these next eight years as it has in the past 20. This further increase in efficiency would reduce the real price of gasoline to its historic average – $2.26 a gallon. (In an odd coincidence, the U.S. Department of Transportation calculates in its own projections that improvements in car mileage will effectively reduce the pump price of gasoline by 2016 to $2.26 a gallon.) Even now, U.S. gasoline prices are below the prices of the 1970s and the 1980s. Since 1970, for instance, world demand for oil has doubled from 45 million barrels a day to 90 million b/d. In the same period, average annual U.S. gas prices (adjusted for both efficiency and inflation and expressed in 2007 dollars) have fallen from $4 a gallon to $3.30 a gallon. From the peak panic of the Iran-Iraq war, gas prices have fallen from $6 a gallon to $3.30 a gallon.

You can also track the rise and fall of retail gas prices for the past 90 years by comparing the price of 1,000 gallons of gas with per capita GDP. From this perspective, gas prices have fallen in every single decade, whether in wartime or in peacetime, since the 1920s – when Americans needed as much as 50 per cent of per capita GDP to make this purchase. In the 1930s, the percentage fell to 35. In the 1950s, it fell to 15 per cent. In the 1970s and throughout the Iran-Iraq war, it fell to 10 per cent. In the 1990s, it fell to 4 per cent, its lowest level ever. In 2007, it increased marginally to 5.3 per cent.